Fed hawks at odds on reasoning for dissents

By IBT Staff Reporter On 08/17/11 AT 4:40 PM

Three U.S. Federal Reserve officials on Wednesday offered sharply differing reasons for opposing the Fed's move to freeze interest rates for two years, suggesting there is no unified revolt within Fed ranks over policy.

Dallas Fed President Richard Fisher, speaking for the first time since he and two others dissented last week on the U.S. central bank's promise to keep interest rates near zero for the next two years, said his main worry was not the possibility that easy monetary policy could send prices spiraling higher.

I believe what is restraining our economy is not monetary policy but fiscal misfeasance in Washington, Fisher, known as an inflation hawk, told a community forum in Midland, Texas. Businesses simply cannot budget or manage for the uncertainty of fiscal and regulatory policy.

Chiding lawmakers just weeks after disagreements over deficit-cutting in Congress brought the United States to the brink of a first-ever debt default, he said that it is Congress, not the Fed, that must act.

Monetary policy cannot substitute for what you must get on with doing, he told them. Get on with your job.

Meanwhile in an hour-long interview breaking his silence on his dissent, Philadelphia Fed President Charles Plosser told Bloomberg Radio he did not want the Fed's inflation-fighting hands tied to a timeframe.

The promise to keep rates low for another two years was inappropriate policy at an inappropriate time, while its statement on the economy was excessively negative, Plosser said. Policy shouldn't be dependent on the calendar, it should be dependent on the economy, he said.

While inflation expectations were still contained, Plosser warned, the Fed needs to guard against the possibility of a sudden shift upward.

Personally, I believe we're going to have to raise rates well before mid-2013, Plosser said. I don't know when that date will be, but it's unlikely to be two years from now, at least from my perspective.

The Fed has kept interest rates near zero since December 2008 and has bought $2.3 trillion in long-term securities to support the economy.

At the Fed's policy-setting meeting last week, the central bank extended its already super-easy monetary policy by promising to keep rates near zero through mid-2013, and said it was weighing other options to support a weak recovery.

The three policy-makers' votes against the new policy made it the first triple dissent at a Fed meeting since 1992.

But with reasons for opposition so broad-ranging, the dissents clearly fall short of a concerted revolt.

The third Fed policymaker to dissent, Minneapolis Fed President Narayana Kocherlakota offered last Friday yet a different set of reasons for his vote.

The U.S. economy is too far improved from November, when the Fed embarked on its last round of bond-buying, for the central bank to offer still further stimulus, Kocherlakota said.

And in an interview published Wednesday, a fourth Fed policymaker, St. Louis Fed President James Bullard, said that he would have dissented if it was his turn to vote this year. Regional Fed presidents rotate into voting spots on the panel every two or three years.

He said the two-year promise limits the Fed's flexibility in adjusting to new data and could foster expectations for deflation, which could then turn into reality.

Inflation as measured by the Fed's preferred core PCE price index rose to a healthier 1.3 percent in the 12 months ended in June, from a low last December of 0.9 percent. Unemployment fell to 9.1 percent in July, down from just over 10 percent at its peak last year.

Plosser agreed with Fisher that the Fed should not try to make up for Congress' lack of action.

I think it's a big mistake for policymakers, either inside the Fed or other places, to believe that if fiscal policy is hamstrung for one reason or another, the Fed has to act, Plosser said.

We run the risk of not being able to deliver on the things people want us to do because we can't, and then when we try, we fail and our credibility is at risk.

Their comments come amid heightened criticism of the Fed as the 2012 presidential campaign gets underway.

Texas Governor and Republican presidential candidate Rick Perry created a stir on Monday when he said he would consider it treasonous if Fed Chairman Ben Bernanke prints more money between now and the election in November 2012.

Perry said Texans would treat Bernanke pretty ugly if the U.S. central bank printed more money ahead of the presidential election.

The last time Bernanke was in Texas was in April, 2010, when he gave a speech in Dallas.

Fisher declined to comment directly on Perry's views but said the Fed was indifferent to criticism and would do what is right.

(With additional reporting by Leah Schnurr and Kristina Cooke in New York, Editing by Chizu Nomiyama)